Right Thinking from the Left Coast

Tag: Default

I’m happy that the GOP has held out on the debt ceiling and continues to hold out for more budgetary discipline. But there are rumblings right now that have me very worried. They have broken off talks with the Democrats and are balking at any revenue increases at all. And a substantial part of the base seems to think that hitting the debt ceiling is preferable to the deal that is currently on the table.

I find that baffling. The deal that is currently on the table is a very good one and one that Republicans have usually accepted. Estimates of the ratio of spending cuts to tax hikes range from 3-1 to 5-1. If it is the latter, that is pretty much identical to the deal the Republicans proposed back in March. Moreover, the tax hikes are what they should be, what luminaries like Alan Greenspan have been advocating for years — the elimination of tax expenditures rather than hikes in marginal rates.

There’s another aspect of this: the baseline. If the Republicans do nothing, a number of policies are already programmed into the law. The Bush tax cuts will expire — raising taxes approximately six times what the Democrats are asking. The AMT patch will expire and the SGR cuts to Medicare fees will kick in. In other words, walking away now will give the Democrats everything they want.

Frankly, I’m not sure what the Republicans are holding out for. Further cuts are going to require statutory changes to Medicare and Social Security law, something that can’t be thrown together in a few weeks. We’re at the lowest level of taxation since Harry and Bess Truman were in the White House. There is little evidence that canceling tax expenditures will hurt the economy. What gives?

(I’m also not sure what they’re thinking politically. If we hit the debt ceiling, one of two things happens. Either we stop paying debt interest, which causes a default and the various economic woes. Or we stop cutting checks for military personnel and Social Security recipients. Maybe the Republicans are expecting a crowd of pitchfork waving people to descend on Washington demanding that we don’t raise taxes on people making six figures or more. I just don’t see it happening. If the government stops issuing checks, the Democrats have a winning issue in 2012 — they’re not the ones walking away from a deal. You can then welcome back Speaker Pelosi and enjoy Obama’s second term.)

There are lot of people out there who will tell you that nothing bad will happen if we default. I find this difficult to believe, given the sheer scale of our debt. I find that difficult to believe, given the near unanimity among economists that this would be Very Bad Thing — bad for the bond market, bad for the dollar, bad for the stock market, bad for unemployment.

Even if we give the debt ceiling breakers a doubt, I still don’t see it. Let’s say that there is a chance — however remote — that a default does not trigger another even worse economic crisis. Do we want to take that chance? Do we want to pull the trigger on the revolver to find out if the chamber is empty? That’s about as anti-conservative a position as I can imagine: to risk the economy because of the unwillingness to sign a great deal in favor of an ideologically pure one.

But then again, I don’t recognize today’s GOP. Heedless risk in the service of ideology defines them. They are willing to, for example, gamble hundreds of billions of dollars and thousands of lives on nation building. Pragmatic conservatism, risk reduction, bet hedging — this is something alien to today’s GOP. They are more interested in sticking to ideology than governing.

In the end, the wild card here is whether Obama decides to take the 14h Amendment solution, bypassing Congress on the debt ceiling. While Congress is constitutionally charged with debt, the ceiling is more of an historical artifact than anything else. It was implemented when the Treasury actually had to physically raise funds and therefore needed instruction on just how much to raise. In today’s electronic era, it mainly serves as a political bone.

But you know what? I think the dirty little secret of the GOP is that they want Obama to bypass them. It would obviate the need for difficult budget cuts and/or tax increases. It would let them blame Obama for something and enrage the base. It would give them fodder for ranting and raving and calling for impeachment and slagging Obama as Marxist communist Kenyan anti-colonial whatever. The only people who would be hurt are the few remaining taxpayers, investors, the employed, the unemployed, business people, etc. But the political class would be set.

What’s to lose? Only their ability to govern. But I have yet to be convinced that the GOP values the ability to govern. I’ve been surprisingly impressed by Boehner so far this year. Now is his real test: to see if he can cut a deal and save the GOP from themselves.

Update: An interesting post at powerline argues that low taxes cause higher spending by, essentially, allowing people to buy more government at a discount. I think he makes an excellent point. If taxes were high enough to pay for the government we have, there would be a lot more conservatives.